Ch. 14 Budgeting Process

Question 1

An estimate of the income and expenditures during a given period of time based on the mission, goals, and objectives of an organization
- It is the organization’s business plan expressed in financial terms

Answer 1

Budget

Question 2

• Set the parameters for activities to be done during the budget period
• Act as a control device for regulating spending in the organization
• Provide an objective set of criteria (STANDARDS) against which a manager’s performance can be measured

Answer 2

The Purpose of Budgeting

Question 3

An organization’s total budget that includes an operating budget, a capital budget, a cash budget, and a budgeted balance sheet

Answer 3

Master budget

Question 4

An estimate of the anticipated cash flow that can be used to project the availability of funds
- Deals with cash on hand, accounts payable, accounts receivable, the cost of credit, and cash flow
(Dietetics professionals don’t generally deal with this)

Answer 4

Cash budget

Question 5

A statement of the assets and liabilities of an organization based on budget estimates
(Dietetics professionals don’t generally deal with this)

Answer 5

Budgeted balance sheet

Question 6

Budget that includes the revenue, expenses, direct labor, direct material, overhead budgets, and other operating expenses
- Used in projecting the income of an organization and in allocating funds within an organization
- Are prepared for the entire organization and for each individual operating unit

Answer 6

Operating budget

Question 7

12-month period for which an organization plans the use of its funds
- Can begin on any date and end 365 days later (366 days in leap years)

Answer 7

Fiscal year

Question 8

12-month period beginning January 1st and ending December 31st

Answer 8

Calendar year

Question 9

Operating budget is divided into time periods for the purpose of financial reporting
- Some organizations use calendar months (12 per year)
- Some organizations use 4- week blocks of time (13 per year)
- Some organizations have two 4-week periods followed by a five-week period each quarter (12 per year)

Answer 9

Accounting period

Question 10

Type of operating budget based on the previous year’s budget and a predetermined increment
- Depend on several factors: inflation rate, labor contracts, profitability, operating losses, restructuring, reengineering, etc
- Increment is usually positive, but could go up or down (e.g. economic downturn)

Answer 10

Incremental Budgets

Question 11

Incremental Budgets: Advantages & Disadvantages

Answer 11

Advantages
- Easy to prepare
- Relatively precise (if historical data is accurate)
Disadvantages:
- Unresponsive to change
- Discourages innovation
- Supports the status quo

Question 12

Type of operating budget based on estimated need for the coming year, without relying on last year’s budget as a starting point
- Requires managers to write budgets from scratch and justify every dollar of proposed spending

Answer 12

Zero-based budgets

Question 13

Zero-Based Budgets: Advantages & Disadvantages

Answer 13

Zero-base budgets work well:
- during restructuring, rapid change, for start-up or high-tech companies
Disadvantages:
- difficult & costly to prepare
- vulnerable to politics & manager’s bias

Question 14

Budget plan for which funds are allocated for the entire fiscal year (aka static budget)
- Can be used in conjunction with either the zero-base budget or the incremental budget
- Provides manager with measurable goals
- Are inflexible and unresponsive to changes in the volume of work
- Commonly used for non-profit and government organizations

Answer 14

Fixed budgets

Question 15

Budget plan for which expenses will vary in response to actual production, volume, or revenues (aka flexible budget)
- Can be used in conjunction with either the zero-base budget or the incremental budget
- Allow for variations in costs with volume fluctuations
- More reactive than predictive
- Difficult for some organizations to respond quickly to volume changes, especially when volume decreases

Answer 15

Variable budgets

Question 16

Types of Budgets

Answer 16

• Incremental/Fixed
• Incremental/Variable
• Zero-Based/Fixed
• Zero-Based/Variable

Question 17

Budget is based on previous budget cycle; once the percent change has been established, the budget is set at that level for the next budget cycle

Answer 17

Incremental/Fixed Budget

Question 18

Budget is based on the previous budget cycle; the actual dollars allocated will vary in proportion to the amount of work done

Answer 18

Incremental/Variable Budget

Question 19

Budget is written “from scratch” for each budget cycle; once the numbers have been established, the budget is set at that level for the budget cycle

Answer 19

Zero-Based/Fixed Budget

Question 20

The budget is written “from scratch” for each budget cycle; the actual dollars allocated will vary in proportion to the amount of work done

Answer 20

Zero-Based/Variable Budget

Question 21

1. Project revenues
2. Estimate labor needs and costs
3. Estimate non-labor expenses
4. Combine the parts of the budget to project profit or loss

Answer 21

Steps to Preparing Operating Budgets

Question 22

Any unit within an organization that has expenses
- Some also generate revenue (foodservices, pharmacy)
- Some are not expected to generate a profit or even break even (payroll, HR)

Answer 22

Cost Center

Question 23

Any unit within an organization that generates income
- Can also be a cost center
- May or may not produce enough income to offset its cost of operation

Answer 23

Revenue Center

Question 24

A unit within an organization where revenue exceeds operating costs

Answer 24

Profit Center

Question 25

The projection of the income of an organization (or a department) based on the sale of products
- Is part of an operating budget
- Written only for revenue centers
Considerations:
- The volume of goods/services to be produced and the price
- Revenue from non-sales sources: gifts or grants
- Bad debts (people cannot pay their bill), discounts

Answer 25

Revenue Budget

Question 26

Part of the operating budget that deals with all anticipated costs
- Prepared for every department
- Can be further divided into sub-budgets:
- labor (direct & indirect)
- material (direct & indirect)
- overhead
- other expenses

Answer 26

Expense Budget

Question 27

Prediction of the costs needed to get the work done
- May be part of the expense budget or a separate part of the operating budget

Answer 27

Labor Budget

Question 28

Labor costs related to getting the work done (base pay, OT, pay in lieu of benefits)
- Included in the labor budget

Answer 28

Direct labor costs

Question 29

Labor costs which managers have little control over, like taxes, insurance, paid time off, and so forth
- Not always included in the labor budget

Answer 29

Indirect labor costs

Question 30

Part of the expense budget; computed for organizations or departments which make a tangible product

Answer 30

Material Budget

Question 31

The estimate of cost for raw materials that go into making the product

Answer 31

Direct material budget

Question 32

The general expenses associated with the operation of a facility like rent, taxes, utilities, repairs, and maintenance

Answer 32

Overhead

Question 32

The estimate of cost of materials used, but not associated with making the product (i.e., office supplies)

Answer 32

Indirect material budget

Question 33

Subdivision of the operating budget that encompasses all other anticipated costs of operation (e.g. telephone bills, printing, travel, fees, licenses)

Answer 33

Other operating expenses

Question 34

Project spending on items that are costly and durable such as land, buildings, vehicles, and major pieces of equipment
- Not a part of the operating budget
- Usually there is an organization-wide system for allocating capital funds
- Managers must write proposals to request these monies

Answer 34

Capital Budgets

Question 35

1. Determine what capital goods are needed
2. Prioritize the items on the list of needs
3. Estimate the cost for each proposed capital expenditure
4. Prepare the capital budget request including justification and cost data – return on investment
5. Submit the proper paperwork to formalize the request

Answer 35

Five-step process to preparing a capital budget